Being prepared for big events is generally a smart idea. Taking out a mortgage is certainly a big event in most people's financial lives, to say the least.
Speaking to a lender – or multiple lenders – about your eligibility for a home loan is a great way to prepare. This step usually results in either a letter of pre-approval, or a letter of pre-qualification.
These terms sound very similar, and they're often used interchangeably by lenders and people you'll communicate with during the homebuying process. But, there are some slight differences between the two.
Pre-qualification is thought of as the first step in the mortgage process, according to Zillow. It typically involves describing your income, credit, debt and any assets you have. It's a fairly informal process, and often doesn't require proof of any of this information.
Some lenders may check your credit during this process.
If you pass the lender's requirements for a mortgage based on the information you provided, you'll receive a letter of pre-qualification. It'll include information like how large of a loan you qualify for and the interest rate. This will help immensely when you begin shopping for homes, as it will help you stay within budget.
However, it's important to remember that the pre-qualification letter is not a guarantee, NerdWallet explained. You may find, when it's time to actually take out the loan, the lender offers you a different loan size or interest rate.
Getting pre-approved is a common second step in the mortgage process with some lenders, or it may be the only step for others. Some lenders only have a single process, which they refer to as pre-approved or pre-qualified interchangeably.
Typically, the pre-approval process is a bit more stringent than the pre-qualification process. Instead of simply describing your financial situation, like income and debts, you'll provide W-2s, pay stubs and other documents.
Since the lender will already have much of your information by the time you need to secure a loan – when you're ready to make an offer on the house – the underwriting and loan approval process will go by much quicker after you've been pre-approved.
If you qualify for a loan, the lender will provide you with a letter of pre-approval. Just like a letter of pre-qualification, it will include information about the loan size, type and interest rate you qualify for. And, like the letter of pre-qualification, this document is not a guarantee of the terms of the loan you may end up with.
Since the process varies from lender to lender, there's no definitive right answer to whether a letter of pre-qualification or pre-approval is better.
The benefits of getting pre-approved or pre-qualified for a mortgage include:
In either case, getting pre-approved or pre-qualified for a mortgage is a smart first step in the homebuying journey. At The Federal Savings Bank, you can take the first step toward getting pre-approved for a home loan online.